Thursday, March 31, 2011

Fundamental change cannot be regulated or imposed top-down; it comes from a new understanding that transforms the culture.

People claim they want to change what's wrong with America, but they don't know how. Here's how: recycle 300 Congresspeople every two years until we get a leadership that isn't beholden to crony-cartels and State fiefdoms.

Right now, we continue to elect toadies who have brown-nosed their way to a "war chest" of $10 million (or more, much more) in campaign contributions because they have observed that Americans will vote for whatever toadie buys the most media exposure, i.e. TV adverts.

You want change? Then refuse to vote for anyone who has sold their soul to raise $10 million to buy propaganda time on TV. You want change? Then start voting for the guy or gal who refuses to accept any campaign contribution of more than $25 and who renounces expensive media propaganda as the avenue to elected office.

I know this sounds quaint and naive, but when The Triumvrate (Jeff, Dexter and I) were running the People's Party of Hawaii in the ealy 1970s, we publicly declared that we would not accept any contributions above the cost of a case of beer. Today that's about $25.

You will not tear the political machinery from the grasp of the Financial and State Elites by whining about campaign reform laws. You can only do so by voting out anyone and everyone who "plays the game" of raising millions to get elected and thus enslaving themselves to the Power Elites.

In other words, change will only occur when costly TV adverts will automatically doom a candidate's campaign, because people have grasped that the only way the candidate could raise the money required to buy the propaganda was to sell his/her soul to various corporate and State Power Elites.

In other words, change starts in the minds and resolve of the voters. Once running a slick TV ad instantly dooms a politico's campaign, then we'll stop rewarding the most pathological aspects of the political machinery.

Real change will occur when if word leaks out that you've raised millions of dollars at fat-cat fundraisers, you've already lost the election.

Real change will only happen when voters reward those politicos who refuse to vote with their party. As long as we continue to elect people who vote in blocs, then we will continue to be ruled by Power Elites who pull the strings behind the blocs. The ideologies are of course mere window-dressing: the only real battle between the parties is which fiefdom or Power Elite will gain a relatively larger slice of the Savior State/Empire's swag.

Change will only occur when the candidate who refuses to accept more than $25 from any group or individual and who lists every contribution on his/her website wins by a landslide over the slick multi-million dollar media campaign run by big-bucks operatives.

There cannot be any real change until the voters start rewarding candidates who will refuse to meet with lobbyists from any industry or fiefdom. Imagine that: a politico who slams the door to K Street and who refuses to even take the calls of the fat-cat lobbyists and assorted other sycophants and sociopaths.

In the current climate, anyone who refused to kow-tow to lobbyists, fiefdoms and Power Elites would soon face an opponent in the next election sitting on millions of dollars donated by the lobbyists, fiefdoms and Power Elites who desperately need a puppet to maintain their perquisites.

The only way to break our present bondage to concentrations of wealth and power is to vote out anyone who raises millions of dollars and who runs a slick and costly media campaign. The only way things will ever change is a cultural shift in values and understanding that reverses the current chain of command and cultural value system.

Right now, the CEO and corporate titan is literally worshipped and fawned over as a living god. The most revered few on the altar of secular worship are those who have "created shareholder value" by whatever means are necessary. That worship of corporate culture goes hand in glove with a profound political passivity, a passivity masked by ginned-up ideological charades and media parades.

Both parties support the Global Empire, the Savior State dependent on rising deficit spending, and the dominance of cartel-crony "capitalist" Power Elites for whom the profits are always private but the losses and risks are always public. End of story: the "differences" between the two parties are all cosmetic, a political theater of whose favored fiefdoms and cartels get a tiny reduction in their rate of growth and whose get a massive injection of borrowed money.

Change cannot be imposed via campaign finance rules; change flows from a citizenry who refuse to consent to the Status Quo. Change will only occur when a candidate espousing the following agenda wins by a landslide, crushing the sycophants and toadies who followed the Status Quo line of selling their soul for a multi-million dollar TV advert campaign and brown-nosing the Power Elites both public and private:

1. I will not accept anonymous or cloaked donations.

2. Every donation and the name and affiliation of every donor will be listed prominently on my website.

3. I will not accept donations or gifts of more than $25 from any group or individual.

4. I will not meet with lobbyists or their representatives. They can submit a letter for review by my staff, just like any other constituent.

5. I will not follow the orders of my party bosses, but will vote independently for what I perceive as the good of the nation. If the nation sinks, so does my community/state.

6. I will not promise you additional entitlements and government-funded benefits.

7. I will tell you the truth, as that is what you elected me to do.

8. I am not afraid to lose my office or power. By all means, take it; staff payday is Friday and don't forget to tip the janitorial staff and doorman.

You want change? Then start supporting candidates who will pledge the above 8 points and stop voting for the toadies and sycophants who are beholden to the Status Quo Power Elites.

As long as we are swayed by slick TV propaganda campaigns and enthralled by carefully choreographed political theatre, then we will continue to get what we deserve: a nation doomed to lies, propaganda, devolution, debt and rising instability.

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Wednesday, March 30, 2011

You might think property taxes have declined 30%, paralleling declines in housing values. But nope--property tax revenues have shot up 27% just since 2006.

Something remarkable happened to property taxes in the U.S. while housing lost 31% of its value from 2006 to 2009: they went up by $100 billion (27%). Equally remarkably, as we can see from this U.S. Census Bureau data on state and local tax revenues, property taxes went up even when housing slumped in the early 1990s.

So though U.S. housing continues losing value--U.S. home prices declined in January,continuing a downward trend that began in August, with average U.S. home prices retreating to summer 2003 levels, according to the S&P Case-Shiller home-price indexes--property tax revenues continue their inexorable rise.

I've plotted out the total national property tax revenues on a chart of the Case-Shiller home-price index.

According to the Bureau of Labor Statistics inflation measures, if property taxes had risen along with inflation, the total property tax revenues nationally would have risen from $210 billion in 1996--more or less about the start of housing's decade-long bubble--to $296 billion in 2011.

So even as the net worth of property has fallen by a third, the property taxes collected from the owners have risen 27%. Exhibit A in this ceaseless rise of property tax revenues is the structural shortfalls in state and local government budgets between what was promised to various fiefdoms and constituencies at the apex of various bubbles, and what is sustainable in non-bubble times. Here is a chart of California's systemic gap between revenues and expenditures. Please note that the apparent alignment of revenues and expenditures in 2010-11 is entirely illusory: the budget gap is $26 billion or perhaps more, once the fantasy accounting is removed.

And here is a chart of house prices in a classic symmetrical post-bubble deflation. I've drawn a target which is drawn from the reversion-to-the-mean model that the majority of bubbles track: prices don't just retrace to the starting lift-off point, they overshoot to a level below that initial line.

As I reported in House Values Fall 30%, But Property Taxes Keep Rising (December 22, 2010), the nation's state and local governments will collect an estimated $476 billion in property taxes in 2010--about 90% of state income tax revenues of $250 billion and sales tax revenues of $286 billion combined.

A decade ago, property taxes were roughly equivalent to sales taxes. In 2000, property taxes totaled $247 billion and sales taxes came in at $223 billion-- a differential of roughly 10%. Sales taxes have increased by 28% since 2000-- roughly in line with the rise in consumer prices.

State income taxes have risen nationally from $217 billion in 2000 to $250 billion in 2010, after peaking at $303 billion in 2008, just as the global financial meltdown began. That's a rise of $33 billion, or 15%--actually less than inflation (27% from 2000 to 2010).

Add all this up and we can see that local governments have become far more dependent on property tax revenues than they were in 2000. Thanks to stiff increases in junk fees and taxes of all kinds, state and local government revenue has climbed back to its pre-recession height of $1.29 trillion, roughly equal to the $1.32 trillion collected in 2008. In terms of total tax revenue, the recession is over--yet the gap between expenditures and revenues continues to widen in most states and local governments.

As their properties continue sliding in value, devastating their net worth, do you reckon the average homeowner might start resenting the rapid rise of the taxes they pay for the privilege of owning real estate?

Imagine if your income taxes rose by 27% even as your income declined by 30%.

The ultimate tax hostage is the property owner. The business owner can pull up stakes and leave, the wage earner can transfer or get another job elsewhere, and the consumer can restrict his/her consumption to lower the burden of sales taxes, but the property owner is the perfect tax donkey because the transaction costs of selling are so prohibitive.

With some 11 million homeowners owing more on their mortgage than their house is worth, i.e. they are underwater, then selling is no longer an option unless the bank accepts a short-sale--something the lenders are loathe to do.

Given that there's about 48 million mortgaged homes now, then those 11 million represent about 23% of all homeowners.

How long will property owners keep swallowing significantly higher property taxes even as the value of their real estate continues declining? It's an open question. I suspect the answer won't be known until some invisible breaking point is reached, and voters simply rebel against higher taxes while their own net worth and incomes stagnate.

Just because there is little visible resistance to sharply higher property taxes (and other taxes and junk fees as well, of course) doesn't mean resistance isn't building below the surface, unreported by a financial media obsessed with the S&P 500 as the only metric of wealth and prosperity and unnoticed by state and local governments obsessed with stripmining more tax revenues by any means at hand.

The tax donkey is already weighed down with a heavy load, and it won't take much more than a double-dip recession, higher prices for essentials and declining home values to snap the pack animal's weakened back.

The rising S&P 500 looks good as propaganda, but for most Americans, that's about as edible and nourishing as an iPad.

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Tuesday, March 29, 2011

Manias, bubbles and "momentum investing" all rely on observing a trend and extrapolating it into the future. This is how we get "housing never goes down" and other trends which eventually run out of oxygen.

Consider this example of extrapolation. If you follow basketball at all, either your local high school or college teams or the pros, then you've seen a game start out with one team scoring a quick three baskets for 6 points while holding the other team scoreless, making it a 6 to 0 game.

If we extrapolate those first few moments of play, then we'd expect the score at the end of the game to be 200 to 0.

Let's say the first basket was scored in 60 seconds, the second one after another 30 seconds of play and the third (perhaps a steal) after only 15 seconds. If we extrapolate that timeline, then we soon reach the point where baskets are being scored in milliseconds, as the fourth basket is scored in only 7.5 seconds, the fifth in 3.75 seconds, and so on.

Let's turn from this admittedly absurd example to some real-world charts. The current stock market rally is supposedly based on rising corporate profits, which have rebounded smartly from the March 2009 lows. The Bulls' euphoric expectation of ever-rising stock valuations is based on the extrapolation of these profit trends.

But interestingly, non-financial corporate profits have already peaked and are turning down, while financial corporate profits have already hit the nose-bleed level that marked the last top.

Legions of China Bulls (i.e. true believers of the "China story") extrapolate China's spectacular GDP growth into the future. If we ponder this chart, we see that Japan also experienced a rapid rise in GDP in its boost phase, but that growth rate cannot continue on to the Moon and beyond.

Exactly how much farther China's GDP can run at this rate of expansion is unknown, but anyone betting on this trend continuing at its current trendline for years to come is basically betting on the basketball game's score ending up at 200 to 20.

A peculiarly gripping mania has led many to believe that U.S. healthcare costs can continue rising on its current trendline forever-- or at least until 2050 or so, which is politically the same as 2550. Once again, anyone who thinks sickcare costs can skyrocket by 6% to 11% annually while the nation's GDP is flat or negative (once Federal borrowing and spending are subtracted) is expecting the game to end with a score of 200 to 20.

Few seem to recognize any upper limits on consumer debt. The idea that this trend cannot be resumed strikes terror into the hearts of economists and politicos alike. What does the U.S. economy do for "growth" if this consumer debt trend rolls over and heads down?

All sorts of trends are being extrapolated to justify sky-high stock valuations, insane levels of government borrowing and complacent confidence in a permanent abundance of cheap energy--to name but a few.

The Fed has raced out and scored a few points in the Great Recession, and yet few analysts extrapolate its expanding balance sheet out a few years. Can the Fed really create $10 or $20 trillion in free money and use that to buy up the U.S. economy's impaired debt and unwanted Treasury bonds without any negative consequences?

Corporate profits have rebounded on the back of a declining U.S. dollar and an unprecedented explosion of Federal deficit spending. Yet SIFPs (standard-issue financial pundits) still expect corporate profits to rise steadily despite the fact that the underlying trends have reversed.

Healthcare costs are rising at a rate that leads to all sorts of 200-to-0 games: if the current trendline holds, then the average household's health insurance will cost $300,000 in today's dollars in a few years. Does anyone seriously believe this runaway expansion of healthcare is remotely sustainable?

As stock market Bulls are about to discover, the one thing we know about trends is that they do not continue on to the Moon as per extrapolation lines neatly drawn with a ruler. They flatten, reverse or crash.

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Monday, March 28, 2011

The structural flaw at the heart of the E.U. dooms it and the euro to either dissolution or radical tranformation.

To understand the structural flaw which dooms the European Union, we need to start with the Union's fundamental financial characteristics.

The European Union established a single currency and trading zone for the classical Capitalist benefits this offered: a reduction in the cost of conducting business between the member nations and a freer flow of capital and labor across borders.

This "liberalization" of trade and capital flows is often referred to as Neoliberal Capitalism: short-hand for opening markets and enabling free enterprise to take on tasks formerly reserved for government (the Central State) or State-sanctioned corporations.

The key feature borrowed from Classical Capitalism is that the risks of enterprise and the investing of capital are (supposedly) transferred from the State to the newly liberalized private sector. But this turns out to be a charade played out for propaganda purposes: when the expansion of credit and financialization ends (as it must) in the tears of asset bubbles deflating and massive losses, then the Central State absorbs all the losses which were supposedly private.

I define Neoliberal Capitalism much differently: markets are opened specifically to benefit the central State and global corporations, and risk is masked by financialization and then ultimately passed onto the taxpayers. The essence of Neoliberal Capitalism is: profits are privatized, losses are socialized, i.e. passed on to the taxpayers via bailouts, sweetheart loans, State guarantees, the monetization of private losses as newly issued public debt, etc.

The Central State benefits from the explosion of tax revenues created by financialization and the expansion of credit, and from the vast swag showered on political parties and apparatchiks by the global corporations.

From a Neoliberal Capitalist perspective, the union consolidated power in a Central State proxy (The E.U.) and provided large State-approved cartels and quasi-monopolies access to new markets.

From the point of view of the citizenry, it offered the benefit of breaking down barriers to employment in other Eurozone nations. On the face of it, it was a “win-win” structure for everyone, with the only downside being a sentimental loss of national currencies.

But there were flaws in the structure that are now painfully apparent. The Union consolidated power over the shared currency (euro) and trade but not over the member states’ current-account (trade) deficits and budget deficits. While lip-service was paid to fiscal rectitude via caps on deficit spending, in the real world there were no meaningful controls on the creation of private or state credit or on sovereign borrowing and spending.

Thus the expansion of the united economy via the classical Capitalist advantages of freely flowing capital and labor were piggy-backed on the expansion of credit and financialization enabled by the Neoliberal Capitalist structure of the union.

The alliance of the Central State and its intrinsic desire to centrally manage the economy to benefit its fiefdoms and Elites and classical free-market Capitalism has always been uneasy. On the surface, the E.U. squared the circle, enabling stability, plentiful credit creation and easier access to new markets for all.

But beneath this beneficent surface lurked impossible-to-resist opportunities for exploitation and arbitrage. In effect, the importing nations within the union were given the solid credit ratings and expansive credit limits of their exporting cousins, Germany, The Netherlands, France, Finland, et al. In a real-world analogy, it’s as if a sibling prone to financing life’s expenses with credit was handed a no-limit credit card with a low interest rate, backed by a guarantee from a sober, cash-rich and credit-averse brother/sister. Needless to say, it is highly profitable for banks to expand lending to credit-worthy borrowers.

At the same time, the mercantilist exporting nations had engineered an immensely profitable fixed-currency zone which kept their exports cheap within importing nations, regardless of whatever imbalances developed. In the pre-euro days, current-account (trade) imbalances between, say, Germany and Italy were resolved by Italy devaluing its currency to the point where German imports became expensive and Italian exports became cheap. That ability to re-balance capital and exports flows was sacrificed by the imposition of the euro on all member nations.

This dynamic is illustrated in this chart:

Credit at very low rates of interest is treated as “free money,” for that’s what it is in essence. Recipients of free money quickly become dependent on that flow of credit to pay their expenses, which magically rise in tandem with the access to free money. Thus when access to free money is suddenly withdrawn, the recipient experiences the same painful withdrawal symptoms as a drug addict who goes cold turkey.

Even worse--if that is possible--free money soon flows to malinvestments as fiscally sound investments are quickly cornered by State-cartel partnerships and favored quasi-monopolies. The misallocation of capital is masked by the asset bubble which inevitably results from massive quantities of free money seeking a speculative return.

The E.U.’s implicit guarantee to mitigate any losses at the State-sanctioned large banks--the Eurozone’s equivalent of “too big to fail” banks--enabled a financial exploitation that is best understood in a neocolonial model. In effect, the big Eurozone banks “colonized” member states such as Ireland, following a blueprint similar to the one which has long been deployed in developing countries such as Thailand.

This is a colonialism based on the financialization of the smaller economies to the benefit of the big banks and their partners, the Member States governments, which realize huge increases in tax revenues as credit-based assets bubbles expand.

As with what we might call the Neoliberal Colonial Model (NCM) as practiced in the developing world, credit-poor economies are suddenly offered unlimited credit at very low or even negative interest rates. It is “an offer that’s too good to refuse” and the resultant explosion of private credit feeds what appears to be a “virtuous cycle” of rampant consumption and rapidly rising assets such as equities, land and housing.

Essential to the appeal of this colonialist model is the broad-based access to credit: everyone and his sister can suddenly afford to speculate in housing, stocks, commodities, etc., and to live a consumption-based lifestyle that was once the exclusive preserve of the upper class and State Elites (in developing nations, often the same group of people).

In the 19th century colonialist model, the immensely profitable consumables beingmarketed by global cartels were sugar (rum), tea, coffee and tobacco—all highly addictive, and all complementary: tea goes with sugar, and so on. (For more, please refer to Sidney Mintz’s classic history, Sweetness and Power: The Place of Sugar in Modern History.)

In the Neoliberal Colonial Model, the addictive substance is credit and the speculative and consumerist fever it fosters.

In the E.U., the opportunities to exploit captive markets were even better than those found abroad, for the simple reason that the E.U. itself stood ready to guarantee there would be no messy expropriations of capital by local authorities who decided to throw off the yokes of European capital colonization.

The “too big to fail” Eurozone banks were offered a double bonanza by this implicit guarantee by the E.U.: not only could they leverage to the hilt to fund a private housing and equities bubble, but they could loan virtually unlimited sums to the weaker sovereign states or their proxies. This led to over-consumption by the importing States and staggering profits for the TBTF Eurozone banks. And all the while, the citizens enjoyed the consumerist paradise of borrow and spend today, and pay the debts tomorrow.

Tomorrow arrived, and now the capital foundation--housing and the crippled budgets of post-bubble Member States--has eroded to the point of mass insolvency. Faced with rising interest rates resulting from the now inescapable heightened risk, the citizenry of the colonized states are rebelling against the loss of their credit-dependent lifestyles and against the steep costs of servicing their debts to the big Eurozone banks.

Concurrently, taxpayers and voters in the mercantilistic/exporting member states such as Finland and Germany are rebelling against being saddled with the ever-rising costs of bailing out their weaker neighbors.

Now that the losses resulting from these excesses of rampant exploitation and colonization by the forces of financialization are being unmasked, a blizzard of simulacrum reforms have been implemented, none of which address the underlying causes of this arbitrage, exploitation and financialization.

Understood in this manner, it is clear there is no real difference between the monetary policies of the European Central Bank and the Federal Reserve: each seeks to preserve and protect the “too big to fail” banks which are integral to the Neoliberal State-cartel partnership.

Both are attempting to rectify an intrinsically unstable monopoly-capital/State arrangement--profits are private but losses are public--by shoving the costs of the bad debt and rising interest rates onto the backs of the home-country taxpayers. The profits from this vast arbitrage and Neoliberal colonialist exploitation were private, but the costs are being borne by the taxpaying public.

Any policy maker or pundit who is confident this is a stable arrangement will find his/her confidence was misplaced.

Important note to subscribers and contributors: Long-time contributor Steven W. alerted me to errors in my list of contributors. I want to apologize to Steven and other contributors, and ask that you please email me if I have mis-entered your contribution/subscription or forgotten to ship your book.

This blog is a one-man shop and only one of my four jobs/projects, and despite my best efforts, I do make mistakes. It is important to me to correct them as soon as possible. You, the valiant and generous few hundred, sustain the blog so tens of thousands of other readers get it for free. Not a day goes by that I don't consider shutting the blog down, and you are the reason I don't.

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I just switched the Weekly Musings emails to an external ("cloud") service, and once again I might have mis-entered data in the master list. If you did not receive a Musings email yesterday, please let me know.

Thank you, Steven, for bringing these issues and corrections to my attention, and thank you all for your support and patience.

Saturday, March 26, 2011

When the consensus is confidently weighted on one side of a trade or view, reality has a nasty habit of introducing blowback and/or unintended consequences.

In a followup to yesterday's entry A Contrarian Take on the Dollar's Demise , here are some other contrarian views culled from readers and recent news items. When does a contrarian view or bet become mainstream? Sometimes the answer is ambiguous. When do you look around and realize (usually with some dismay) that "everyone" now agrees with your once-lonely point of view?

Consider gold as an example. I am a fan of gold for the simple reason that it won't go to zero--something that cannot be said of purely financial assets. But as a technical observer, I can't help but notice just how lopsided the trade in gold has become.

According to the CFTC data, there are now 192,838 long contracts on gold and only 3,636 short contracts. That is a remarkably one-sided trade, and one that is technically ripe for a major reversal. When everyone agrees you can't miss on a trade, and punters are betting 50-to-1 that the trade can only go one way, then that's when it reverses and crashes.

As a technical observation, this is completely disconnected from all the fundamental reasoning behind owning gold. In other words, if you are one of the many readers who own gold long-term for peace of mind and insurance, then a 20% decline in gold is merely a "buy the dip" opportunity. For traders, it may offer an opportunity to gain on the downturn and then again on the inevitable upturn.

Correspondent Martyn T. recently made what I consider an important and contrarian point about the financial consequences of Japan's devastating earthaquake and tsunami.

So far you have not noted the way in which the Japanese insurers will affect stock markets. The Japanese government has long insisted that insurers prepare for a major event. This was expected to be an earthquake hitting Tokyo.

Obviously, they would need to have massive reserves, and these should be abroad, so that secure cash can be found.

In their rush to bring in some cash they have sold some and bought yen. This has resulted in other central banks helping to reduce the value of the yen.

But this is only the first tranche of selling. So far they won't know what liquidity they need, but as it rises so will selling, all across the developed world.

In other words, if the rebuilding and insurance claims will end up costing $300 billion, a significant chunk of that will come from insurers and re-insurers who will have to liquidate globally distributed assets such as stocks and bonds to raise the cash.

Let's assume the Japanese government will cover half of the costs of rebuilding and insurers will have to cover the other $150 billion. What will the liquidation of $150 billion in financial assets do to a vulnerable market? I hesitate to offer a prediction, but it is unlikely to be bullish.

Frequent contributor Dr. Ishabaka offered up this menu of other consensus views that "everyone knows to be true":

- the U.S. dollar will continue to decrease in value indefinitely- U.S. real estate will continue to decrease in value indefinitely- the standard of living in the U.S. will decrease- the U.S. stock market is in a bubble- commodities will continue to rise- China will overtake the U.S. as the next great power- U.S. manufacturing is dead- U.S. debt will increase indefinitely- emerging markets will provide the economic growth of the future (along with China)- everyone in poor countries wants to eat more meat, and own a car- energy will increase in price indefinitely- wars and revolutions will continue to increase, perhaps leading to another world war- Social Security and Medicare will go bankrupt- defined benefit pension plans are dead- health care costs will continue to increase at a rate that outstrips inflation indefinitely- unemployment will be serious in the U.S. for the foreseeable future- Fenders beat Gibsons hands down (pre CBS Fenders, I mean)- the gap between the wealthy and the rest of us will continue to increase- government in the U.S. is controlled by lobbyists, unions, and other big money interest groups (banks)

What if all these things "everybody knows" are wrong?

I am not at all sure that "everyone" knows Fenders beat Gibsons, but the list is certainly food for thought. As someone who has played both Stratocasters and my Gibson Les Paul Deluxe, I would say it's more like the difference between a cabernet and a zinfandel wine: sometimes you're in the mood for one or the other, but arguing about which is "best" is pointless, as both are superb but in slightly different ways.

Mark Twain commented on the dangers of consensus thusly: "Whenever you find yourself on the side of the majority, it is time to pause and reflect."

As I concluded yesterday:

When Bears have been eradicated, then the trade has become so lopsided that when it rolls over, it does so suddenly. When everyone agrees, then things become highly unstable. It's ironic, isn't it; on the surface, when everyone shares the same convictions and is on the same side of the same trade, things look rock-solid. Yet that very unanimity guarantees instability.

There is always someone on the other side of a trade, of course: someone originated the option or futures, and someone sold the shares that someone else bought. The problem arises when a "can't lose" trade rolls over, then there are no longer enough buyers to offset the panicky, underwater sellers who are overleveraged via margin or other forms of debt.

This is in effect what still plagues the U.S. housing market: there are still plenty of sellers in the wings, hoping to unload properties, and a dearth of buyers willing to gamble that "the bottom is in." Even worse, there is a dearth of buyers qualified to buy properties at today's prices. That will become even more of an issue as interest rates rise.

As a reminder of how things can play out at real bottoms: in the depths of the 1930s Depression, a Manhattan skyscraper was sold for the original cost of its elevators. In other words, the rest of the building was "free."

People talk about replacement cost as a metric of value in homes and buildings. In other words, this house can't drop much below $200,000 because it would cost that much to buy the lot and construct a replacement house.

That is another thing "everyone knows to be true" that is actually not true at real bottoms. Stocks can end up trading for less than the cash the company is holding.

We might conclude that being contrarian is simply considering very few possibilities as being "impossible," especially when it comes to herd behavior and investments.

Friday, March 25, 2011

Can 97% of the punters be right when they're all on one side of the same trade? Everyone agrees: the answer is "yes."

As I type this Thursday morning, the risk trade is merrily bubbling away: global equities are melting higher, along with gold/silver, oil, seaweed futures, 'roo bellies and everything else except the U.S. dollar, which is universally declared doomed.

Something about the complete correlation of all these markets and asset classes bothers me, as does the absolute consensus that the U.S. dollar has only one possible future: down.

There is only one object of scorn on the other side of this global trade: the universally hated and loathed U.S. dollar.

No wonder. Courtesy of the excellent Jesse's Cafe Americain, here is a long-term chart of the dollar. Yes, it is ugly, and yes, it looks to be on a downward path--except for that flag/wedge which has recently taken shape.

Put another way: there are no Bears left in any trade except for dollar Bears. Bears have been eradicated elsewhere. As a result, there is one guaranteed-to-win strategy:buy the dips on every risk trade.

My contrarian sensibility tingles when literally 97% of the punditry, advisors, and gurus are all confident about the same thing: that the dollar is doomed and gold/silver/equities/'roo bellies/uranium/bat guano, etc. are all "can't lose" propositions.

Yes, yes, oh yes I know that all fiat currencies go to zero, that all currencies are in a race to the bottom and that the dollar has already lost 96% of its pre-Federal Reserve purchasing power, so all we're really talking about is the last 4%--but still, it is striking that 97% of all the active punters, pundits and traders are dollar Bears.

Every once in awhile I skim the views of the various big-name financial pundits and gurus, and I have yet to find any who are making a contrarian bet here. They are all in lockstep, so much so they might as well be wearing cheesy bangled uniforms ("and this medal was for calling the Great Bull Market in 1982") and marching down Wall Street in formation.

Isn't it great when the future is this easy to predict? Who knew it would be this easy to mint billions in profits--and everyone can win by piling in on the same side of the trade. Just bet against the dollar and bet on permanent, raging inflation in tangibles and equities, it really doesn't matter: everything is going to the moon as the dollar inevitably plummets toward zero.

Garsh, I love it when there are no confusing feedbacks to worry about, or any pushback. All the pundits agree: buy gold, timber, emerging markets, private islands, gravel, bat guano--it doesn't matter, it's all going to skyrocket because there is one thing we all know for sure: the U.S. dollar is doomed and going to zero.

No feedback, no pushback, no unintended consequences--forget all that stuff, it's needless because this is so obvious.

Why am I reminded of the initial dot-bomb slide, when all the pundits and brokerage houses were recommending dot-coms at $40 per share, down from $80 and still "buys"? It was all so "can't lose." There was only one wee problem: everybody was on the same side of the boat.

You have to wonder what Jesse Livermore would be doing now that literally the entire investment world is on the same side of one global trade.

I don't usually consider myself easily shocked, but I have to confess the uniformity of conviction right now is breathtaking. Do all these players and pundits really believe the market will reward the 97% of the punters who have piled in on the same side of a trade?

This uniformity of conviction, this belief in an absolute ("real estate never goes down," "the dollar is doomed," etc.) marks the apex of investing bubbles and manias.

Hey, maybe everyone can pile into the same side of the same trade and keep logging fat gains; if so, then we can all become millionaires with incredible ease.

Maybe the dollar will track everyone's expectation to a T. Maybe there are no feedbacks, no pushback, no unexpected bumps in the One Big Trade. Maybe history has truly ended and the inevitable is now visible to all.

Maybe everybody can be right at the same time.

I find it peculiar that when people talk about the dollar's inevitable demise and the inevitability of hyper-inflation, they speak of the dollar not as a political construct governed by political decisions and political will, but as a Force of Nature, somewhat akin to a boulder rolling downhill. To question the dollar's demise is like expecting a giant thundering boulder to suddenly stop in mid-air as it tumbles down a mountainside: impossible.

Maybe it is all this easy and predictable, but my contrarian sense rebels at the current uniformity of conviction and the certainty that the future will track one easily predicted vector.

But I do have one tip: forget rare earth metals. The commodity that's about to take off is bat guano. I understand there's a leveraged ETF that's about to be released, and a bat guano futures market is about to open in Freedonia with 24/7 online trading. You can't miss, because everyone agrees.

Though it seems to have been forgotten, that's when things crash. When Bears have been eradicated, then the trade has become so lopsided that when it rolls over, it does so suddenly. When everyone agrees, then things become highly unstable. It's ironic, isn't it; on the surface, when everyone shares the same convictions and is on the same side of the same trade, things look rock-solid. Yet that very unanimity guarantees instability.

Thursday, March 24, 2011

Housing has supposedly "hit bottom." Perhaps it will drop abruptly in a phase shift to much lower valuations.

Way back in August 2006, near the top of the housing bubble, I suggested a two-part scenario for the housing bust: it would take eight more years to play out, and the declines would occur in sharp downlegs following a phase-shift model.

A few months later, literally at the top of the housing bubble in early 2007, I suggested that a mere 4% of homeowners defaulting could trigger a collapse of the entire U.S. housing market.

That is pretty much exactly what happened, for when the 4% who couldn't pay their subprime mortgages folded, they took down an exquisitely corrupt and vulnerable banking sector and the FIRE (finance, insurance, real estate) economy which had come to depend on it.

As I noted in Phase Shifts, Stick/Slip and the Demise of Our "Socialist" Housing Policy(February 26, 2010), the "recovery" in housing visible in the chart below was entirely the result of a 99% "socialist" Central State intervention/prop job: the Federal Reserve bought $1.1 trillion of dodgy mortgages to mask the bad debt and keep interest rates low, and the Federal government flooded the housing market with fee money via subsidies and absurdly cheap, central State-guaranteed FHA loans.

Now that this massive Central State intervention has ended, housing sales and values are succumbing to gravity.home sales and prices fall:

The National Association of Realtors said Monday that sales of previously occupied homes fell last month to a seasonally adjusted annual rate of 4.88 million. That's down 9.6 percent from 5.4 million in January. The pace is far below the 6 million homes a year that economists say represents a healthy market.

Nearly 40 percent of the sales last month were either foreclosures or short sales, when the seller accepts less than they owe on the mortgage.

One-third of all sales were purchased in cash - twice the rate from a year ago. In troubled housing markets such as Las Vegas and Miami, cash deals represent about half of sales.

The median sales price fell 5.2 percent to $156,100, the lowest level since April 2002.

The median price for a new home sold in February fell 13.9% from the prior month to $202,100, the lowest since December 2003.

Here we see the first phase shift decline and the "recovery," which is now rolling over.

I submit that the forces acting on price are mutually reinforcing to the point that price will drop rapidly in a second phase shift, with the target noted on the chart: a return to the price levels of 2000.

Once we get into the 2012-14 timeframe, then I expect a third phase shift will drop prices back to 1987 levels. As many observers have noted, bubbles don't retrace to historical averages--they over-correct to extremely low values.

2. Interest rates will rise. Most financial analysts are supremely confident that the Fed can keep interest rates near-zero forever. I suspect their confidence is misplaced. As I discussed yesterday, the Fed has backed itself into a corner, where if it pursues QE3 then it will fire up inflation that will destroy profit margins and household purchasing power. If it ceases to buy U.S. Treasury debt, then interest rates will shoot up.

As interest rates rise, the amount of money home buyers can borrow drops. House prices follow this dynamic.

3. Income for the bottom 90% is stagnant. All the bogus "housing is now affordable again" charts floating around all base their rosy conclusions on median income, neatly avoiding the reality that the top 10% has garnered the majority of income gains. Factor out the top 10% and you find real incomes have actually declined for the lower 90%.

The same effect is true of the "wealth effect" powered by the speculative risk trade bubbles in stocks and commodities. These portfolio increases have only enriched the top 10% who own the vast majority of the financial wealth.

So yes, real estate favored by this top 10%--Manhattan, Westwood, San Francisco, etc.-- will hold its own as those benefiting from fat Federal contracts, Wall Street's renewed license to practice piracy, the bubble in lighter-than-air Web 2.0 stocks, etc. try to outbid each other, but for most housing, the support created by demand has just melted like dirty ice on a hot Spring day.

4. There are too many houses and not many buyers. The demographics are this: Baby Boomers are trying to sell to cash out or move, and the impoverished generations behind them cannot afford bubble-era prices. Just because prices have retreated to 2002 levels doesn't mean they're cheap--2002 was already a bubble, as you can see in the chart.

5. The Federal-supported "recovery" is in trouble, politically and financially. As long as the nation obeys the whip of the Fed and allows it to print $1 trillion to buy Treasury debt every year, then the travesty of a mockery of a sham can continue. But as I noted yesterday, this policy is destroying the dollar and the purchasing power of households. That game cannot run for long without political pushback. Saving the "too big to fail" banks and the Financial Plutocracy might be Item #1 on the Fed's list, but it ranks decidedly lower on voters' agendas.

6. Every investor who bought with cash because "this is the bottom" will 1) be underwater and anxious to sell and 2) be out of cash, having bet their capital playing "catch the falling knife" with real estate valuations. Sorry, cash buyers: the knife is still falling.

Wednesday, March 23, 2011

The dollar has reached a point of double-bind for the Fed: push it down further or allow it to rise, it won't matter: either way, stocks will fall off a cliff.

I've got a funny feeling that all the ramp-and-camp, extend-and-pretend POMO games propping up stocks are about to stop working. That would of course trigger a long, deep slide in equities, because as we all know, it's the Federal Reserve's games which have goosed the market to its current lofty heights. The market's confidence in the Bernanke Put--that is, the belief that the Fed will never let stocks decline-- remains supremely undimmed.

A lot of very good technical analysts see sentiment reaching lows which usually mark market bottoms. I am not so sure about this interpretation, for the investors intelligence readings are still complacently bullish.

Other very good technical analysts haven't yet seen a break in the long-term uptrend, so they too have reservations about any real decline.

Various Wall Street analysts are predicting a "mild correction" of 7% to 10%, after which it's off to the races once again--a pause that refreshes the permanent Bull.

I've got a funny feeling that it's lose-lose time for the Fed's games. here's the basic game plan: inject tens of billions of free money into the "risk trade," i.e. equities and commodities, ramp the futures markets when volume and liquidity are low, and crush the U.S. dollar.

It's practically a perfect inverse correlation: when the dollar tanks, stocks move higher, and when stocks hit bottom then the dollar peaks. Think see-saw: when one tops out, the other hits bottom, and vice versa.

Interestingly, there is a rough correlation with the 40-week (9 month) cycle that many chartists watch. If that holds in the chart of the dollar, then the dollar should rise to a near-term peak in about 8 to 12 weeks. That further suggests stocks will crater.

Notice that the dollar has been driven down to an important inflection point. If the Fed forces it below the 75 level, then that opens the way to 72 and a careening collapse below the line-in-the-sand at 71.

There's an inherent limit to the "drive the dollar down to boost equities" game: inflation, which is already on track to hit 8.3% in 2011 (via Zero hedge).

For there's another see-saw dynamic: the lower you push the dollar, the more all the imports the U.S. depends on cost, generating a loss of purchasing power that is often called inflation.

Though the Ministry of Propaganda is running full-tilt pumping out statistics that "prove" inflation is near-zero, the recent "you can't eat iPads" heckling of a Fed official reflect the growing disbelief in these official pronouncements.

So here's the lose-lose double-bind: if the Fed continues destroying the dollar, then they will feed the rising-input-costs monster which devours corporate profits like a 10-year old devours Oreos. In a climate where consumers' incomes haven't risen for decades in real terms, passing on higher prices is a non-starter.

So profits will take a hit, and since the market has priced in ever-higher profits, the market will plummet when profits "unexpectedly" decline.

But if the Fed insists on pushing the dollar below 75 in the hopes of pumping up equities, they risk triggering a meltdown of the dollar globally and forcefeeding the rising-input-costs monster until a positive feedback loop kicks in and inflation sinks its teeth into the economy. As noted above, that will destroy corporate profits and thus the stock market's lofty valuations.

I also have a funny feeling about this chart. The NASDAQ, heavily dependent on a few superstars like AAPL and riddled with gaps all the way up from its lows in August, could be topping out not for a few weeks but for years.

The always excellent and provocative Imperial Economics blog of B.C. has published some eye-opening charts which overlay the current bullish utopia with those from previous eras. The sobering conclusion is that if history echoes, then the market is about to roll over in a massive decline that will last a year or two.

As I noted in Sorry, Fed and People's Bank of China: You Can't Have It Both Ways(March 15, 2011), you can't pump up money supply and credit to goose "risk trades" in stocks and commodities without inflating asset bubbles and triggering runaway input-costs, i.e. inflation that destroys profit margins and impoverishes stagnant-wage households.

But if the Fed takes its hands off the game controller and allows the dollar to rise, then equities crash anyway.

In other words, the dollar is at a point where either path leads to stocks crashing.Go ahead and destroy the dollar, and the rising-input-costs monster will gut stocks and impoverish households. Back off and let the dollar rise, and the risk trades (equities and commodities) will plummet.

Take your pick: the result is the same.

Disclosure: I opened a long position in UUP, the U.S. dollar ETF yesterday, and added to my QID short against the NASDAQ 100.

Tuesday, March 22, 2011

Here's a simple test of whether the economic recovery is self-sustaining or not: cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing.

Federal Reserve Chairman Ben Bernanke has suggested the economic recovery is almost "self-sustaining," meaning it is no longer totally dependent on Federal stimulus and unprecedented Fed intervention for its "growth."

The key idea here is simple: all the extraordinary stimulus spending, all the bailouts and all Fed programs--buying up $1 trillion in questionable mortgages, $600 billion in quantititative easing purchases of Treasury bonds, and so on--was all necessary to "get the economy through this rough patch." At some magical point we are now approaching (or so we are reassured), the private (non-government) economy will start growing organically, meaning that non-State economic activity will generate a virtuous cycle of economic growth that fuels future growth.

The alternative vision is a bit more bleak. In this view, all the Federal Government and Fed spending and intervention have accomplished is encourage the culture of "extend and pretend" and "free money," and raised the vulnerability of the Status Quo to exceptionally dangerous heights.

In other words, from this height, there can be no "soft landing" when the asset bubbles and stupendous Federal borrowing both collapse.

Here's a simple test of whether the economic recovery is self-sustaining or not:cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing. If the economy is self-sustaining, it will move forward without Federal spending and Fed intervention.

If "self-sustaining" is a fiction, an illusion, a mere figment of propaganda deployed to enable the Status Quo to feast off the remaining productive elements of the U.S. economy, then the economy will absolutely crater.

Let's compare Federal spending in 2004, 2007 and 2010. Remarkably, the Federal government spends $1 trillion more a year now than it did a mere three years ago and $1.5 trillion more than it did a brief six years ago. Here are the numbers from the Office of Management and Budget website::

revenues

2004 $1.88 trillion2007 $2.56 trillion2010 $2.16 trillion

spending

2004 $2.29 trillion2007 $2.72 trillion2010 $3.72 trillion

deficit

2004 –$412 billion2007 –$160 billion2010 –$1.3 trillion

In three years, Federal spending jumped almost exactly $1 trillion, or 36.7%.

Here are the deficits of the past three years, and the estimated shortfalls for fiscal years 2011 and 2012:

And this isn't even the real total being added to the national debt, as “supplemental appropriations” for war costs and other large expenditures are “off budget” and not included in the “official” Federal deficit. The same is also true of funds appropriated to bail out mortgage giants Freddie Mac and Fannie Mae and other financial institutions.

Gross debt increased by $1 trillion fiscal year 2008, $1.9 trillion in 2009 and $1.7 trillion in 2010--considerably higher than the “official” deficit numbers. Debt held by the Public—which includes Treasury bonds owned by the central banks of China, Japan and other countries--jumped up 80% from $5 trillion in 2007 to $9 trillion in 2010.

So the Federal government will have spent over $6 trillion--almost 41% of the nation's annual GDP--just to keep GDP stagnant. That $1 trillion a year in extra spending is 7% of the GDP, which implies that if the Federal budget returned to the carefree, free-money days of 2007, the GDP would contract by 7%.

And that's not even counting the trillions of dollars injected into the financial system by the Federal Reserve's opaque machinations and money-printing schemes.

So what is America getting for this extra $1+ trillion in Federal spending a year? Just more of the same old Status Quo that did such an outstanding job circa 2008-2010. I have rooted around a conflicting mess of reports on Federal spending, and found precious little of that $1 trillion actually flows to those suffering from the recession.

In 2007, SNAP cost around $30 billion. In 2010, costs rose to $68 billion as the number of people receiving SNAP benefits rose by 15.6 million people, or 57% to 43.2 million in October 2010. So costs rose $38 billion in those three years.

The $787 billion stimulus package passed by Congress in 2009, the American Recovery and Reinvestment Act of 2009, is being spent over several years: $154 billion in 2009, $353 billion in 2010, $232 billion in 2011 and the remainder over 2012 and beyond.

Roughly speaking, that averages to about $250 billion for each of the recession-impacted years, but it doesn't affect the 2012 Federal spending plan much.

So where is the $1 trillion a year being spent? Around $350 billion a year can be attributed to recession-caused spending: extended unemployment, SNAP and the stimulus package.

That still leaves $650 billion unaccounted for in 2011, and more in the 2012 budget, which is not influenced by the little remaining stimulus spending. So in effect, the sum in 2012 is more on the order of $850 billion, as the stimulus funding drops to around $50 billion.

Next, let's look at the four big Federal programs:

Medicaid:2007: $276 billion2010: $293 billion (+17 billion)

Medicare:2007: $395 billion2010: $462 billion (+67 billion)

Social Security:2007: $586 billion2010: $724 billion (+138 billion)

Defense:2007: $699 billion2010: $738 billion (+39 billion)

(other sources list other totals, depending on what is included in "Defense." I leave the Department of Energy and Veterans Affairs as separate departments, but if you prefer to include them, you'll find the total budget appropriations for both of those departments increased by only a few billion.)

So these entitlement and Defense programs account for about $260 billion of the additional $1 trillion in spending. Add in the $100 billion in direct costs of recession and you get at most $360 billion. Add in inflation and you get to $410 billion.

So only $600 billion more each and every year is spent to prop up a voracious Status Quo. From various sources, here are the estimates for the Federal budget in fiscal 2011:

revenues (taxes): $2.3 trillion

(if the economy doesn't implode and the creek don't rise)

spending: $3.8 trillion

deficit--borrowed: $1.5 trillion

That $1.5 trillion is roughly 11% of GDP. The Fed has printed over $2 trillion to prop up the mortgage and Treasury markets, seeking to "extend and pretend" the valuations of defaulted assets held on the books, to suppress interest rates and last but certainly not least, to inject hundreds of billions of dollars in free money to goose the risk trade, i.e. stocks and commodities.

The Fed sees a "self-sustaining" economy as one which "only" needs $1 trillion in extra Federal spending and another $1 trillion in Federal Reserve goosing every year just to maintain the same GDP we had in 2007.

I suggest an addict analogy is more accurate: a high-cost, bloated, corrupt and inefficient cartel-State Empire of high-cost, bloated, corrupt and inefficient fiefdoms is like a heroin-addled junkie. The "high" of GDP "growth" keeps requiring ever-larger hits of smack; any slackening in this accelerating consumption of Marching Powder will send the addict careening into the agony of withdrawal.

So what we really have is a Status Quo that now needs $2 trillion or more in "free money" injected into its fiefdoms and Elites just to keep from crashing. It would laughable if it wasn't so tragic: here is Ben Bernanke, shoving the needle of QE2 into the twitching half-dead addict and declaring that the zombied-out junkie is on the threshold of "self-sustaining" something or other.

The only cure for addiction is cold turkey. By all means let's keep the methadone and nicotine patch of food stamps flowing, but the Status Quo--the fiefdoms and Financial Elites--will have to go cold turkey.

What does that mean? It's simple: you get the same bloated budget you enjoyed in 2007: $2.7 trillion is still a lot of money. But it is $1.1 trillion less than the $3.8 trillion 2011 Federal budget. Even at $2.7 trillion, we'd be running a staggeringly large deficit of $400 billion.

"Self-sustaining growth" ranks right up there with "we had to destroy the village to save it" as a classic of propaganda gone sour.

Monday, March 21, 2011

The costs of the U.S. "healthcare" system, a.k.a. sickcare, are rising at a rate that is three to five times faster than the growth of the GDP--when it's growing at all. That guarantees sickcare will bankrupt the nation within a few years.

Forget the Pentagon and welfare: what will soon bankrupt the nation is our out-of-control malignant sickcare system, a.k.a. "healthcare." The runaway costs of "healthcare" are undermining the nation's economy on multiple levels.

The people actually providing the care know the system is broken. It's not "fixable" via minor policy tweaks or limiting payments to one slice of providers; the problem is systemic.

The country is in a tizzy over public employee bargaining rights and compensation costs, but few ask this question: What is the biggest cause of public employees compensation soaring to unsustainability? Answer: The costs of providing healthcare, which are rising 6% every year across a flatlined economy, and up to 11% per year for public employees.

By 2012, these costs have more than tripled and by 2016 they will have jumped five-fold. Once again: does anyone seriously believe these trends are sustainable in an economy which isn't even growing at all once we subtract Central State borrowing and spending?

For context on Central State borrowing (Federal deficits): Here are the deficits of the past three years, and the estimated shortfalls for fiscal years 2011 and 2012:

The U.S. spent an estimated $2.4 trillion on health care in 2008, about 16.5% of gross domestic product and a 6% increase from a year earlier. Medical care prices are rising faster than overall inflation, and the burden on consumers continues to grow.

The source of the problem is the "fee for service" foundation of the system. There are no real limits on spending, despite various "reforms" which attempt to limit the runaway costs. Correspondent Quentin VT submitted this article from The New York Times on CEOs of publicly funded hospitals drawing millions of dollars a year in compensation: Immune to Cuts: Lofty Salaries at Hospitals.

Sickcare is fundamentally a system of interlinked politically powerful cartels.

Insiders who refuse to speak on the record for fear of antagonizing the powers that be, exorbitant price increases, confidential agreements and a tug-of-war between warring tribes. Is this the Mafia we're talking about?

From the point of view of investigative journalism, it could also describe America's health care industry. Setting aside the politically attractive mantra of "improving access to healthcare," from this point of view the industry is a highly profitable and politically powerful group of companies which operate in cartel-like fashion: that is, they use their clout to limit competition and establish highly profitable pricing.

These observers use the word "cartel" not in the sense of a formal organization like OPEC (the Organization of the Petroleum Exporting Countries) or the criminal activities of drug cartels, but in the informal sense of a small group of companies which dominate specific markets and thus wield significant political and pricing power within those markets.

Why should we care? Experts say that it is a sign of the medical industry's enormous political power that the health reform bill overlooked some of the biggest cost drivers in American medicine.

And if costs don't go down, then the affordability and sustainability of the U.S. healthcare system become questionable over the long-term. The U.S. already spends twice as much as other developed countries on healthcare as a percentage of GDP.

When asked to identify the source of America's runaway health care costs -- U.S. spending on health care has more than doubled as a share of GDP in the past 30 years -- healthcare industries and trade groups excel at pointing to the next guy as the source. Doctors, hospitals, insurers, HMOs, pharmaceutical companies, malpractice lawsuits and the courts which award huge settlements, Federal regulatory agencies, Medicare--scapegoats abound, and so do rationalizations.

If no one industry is responsible, then perhaps we need to look at the entire system of self-serving industries which profit from guaranteed payments to private-sector corporations which involve special political dispensations such as exemptions from anti-trust laws, and a tolerance for ways of limiting competition and insuring highly profitable contracts.

If the healthcare reform bill doesn't really address the cost drivers and the incentives built into the current system, then it's difficult to see how costs can decline.

This system is based on regional networks of providers negotiating with insurers to exclude competitors and set exorbitant prices that are passed on as insurance premiums. While insurers complain about rising costs, they are exempt from antitrust laws and thus they have the power to consolidate smaller insurers within a region and then pass on price increases to consumers and businesses alike.

A recent report by Massachusetts Attorney General Martha Coakley uncovered multiple forms of anti-competitive behavior among providers, including huge price disparities that had no visible relation to any free-market factors. The report concluded that this and other forms of collusive behavior were "pervasive."

Once upon a time in U.S. healthcare, it was the norm to post prices for procedures and care; this is no longer the norm.

Some local providers who post their prices openly, such as Keith Smith, an anesthesiologist with the Oklahoma Surgery Center, find that preferred provider organizations (PPOs) and insurance companies aren't interested in contracting with his group, even though their prices are 70% less than those charged by local not-for-profit hospitals. To Smith, that is strong evidence that medical cartels are making deals with insurers to monopolize services in their region.

To cite another example of the distortions which end up costing the nation twice as much for health care (as a percentage of GDP) as competing developed countries such as Australia and Japan: Pittsburgh has almost as many MRI machines as the nation of Canada.

According to local media reports, Western Pennsylvania has about 140 MRI machines, while the 32 million residents of Canada share 151 MRI machines. And the machines are getting a lot of use: the number of CT and MRI scans (scans other than old-fashioned X rays) tripled from 85 to 234 per thousand insured people since 1999.

As if that wasn't enough to highlight the self-serving nature of "fee for service" cartels, MRI scanner manufacturer General Electric waged a two-year lobbying campaign to roll back cuts in Medicare reimbursements for scans. While the effort proved unsuccessful due to the intense political pressure to reduce soaring Medicare costs, some critics claim that providers simply made up the reduced reimbursements by increasing the number of tests administered.

The only solution that actually addresses the systemic problem is to get rid of the entire fee-for-service structure and break up the cartels. Healthcare must be reconnected to diet, nutrition, fitness, lifestyle and community, and to education and emotional well-being.

The odds of any of this happening are essentially zero, and so we can safely predict that sickcare will bankrupt the nation (with a helping hand from the Pentagon) within a few years.

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